Smuggler's Blues

To get an audience with China's most wanted man, you drive past Mr. Kim's Kimchee Emporium, Chan's No. 1 Chinese Language Tax Accountancy and the One-Stop XXX Adult Shop. Eventually, you pull up at the Crystal Palace—a deceptively named apartment complex in Burnaby, a dismal strip-mall suburb of Vancouver full of Asian immigrants. The elevator takes you to the 17th floor. You disembark and a cheap plywood door opens. There stands a man with slumped shoulders, his once merry cheeks deflated. Behind him, dishes are stacked high in a crowded kitchenette, the greasy smells of a Chinese breakfast congealing in the stale air. "Hello," he says softly, searching for more English words before shrugging apologetically and repeating his one English word again. "Hello, hello, hello."

It wasn't supposed to turn out like this, not for this self-made businessman who once paraded through the freewheeling southern Chinese city of Xiamen in a bulletproof Mercedes-Benz formerly used by President Jiang Zemin. If the Chinese dream is to get gloriously rich, then few Chinese rode that dream harder or further than the chubby, former well digger who became synonymous first with spectacular success and then with criminal excess. Indeed, Lai Changxing's business empire was so powerful that locals used to joke that Xiamen should change its name to Yuanhua, the name of Lai's company. Ever ready to toss a 100-yuan note to a passing vagrant, Lai earned a reputation as a modern-day Robin Hood, a big-hearted billionaire who helped out folks far more than most stingy government cadres ever did. But today, Lai has been charged by Beijing as the mastermind behind China's largest-ever smuggling ring. Now, at 44, the once mighty entrepreneur sits under house arrest in Vancouver, meekly awaiting word on whether Canada will extradite him home to face charges of smuggling, bribery and tax evasion—all of which he sees as a sure ticket to execution.

China has promised that Lai will not face the death penalty if he is returned. But 14 others convicted of lesser transgressions have been sentenced to death for their roles in Lai's financial dealings, and at least seven of them have already been executed. In all, more than 300 have been jailed for their involvement with Lai. Among those nabbed were top-level bureaucrats allegedly paid off by Lai, including Li Jizhou, the Deputy Minister of Public Security in Beijing, and Lan Pu, the vice mayor of Xiamen. In the teahouses of the capital, pundits whisper that the Lai case could reverberate even higher up into the echelons of power—and that's why China wants him home, to keep him quiet. Lai and his wife Zeng Mingna, now a haggard slip of a woman, refuse to believe China will honor its diplomatic promise to spare them from execution. "You cannot believe the Chinese government," says Lai, snapping a toothpick in half to emphasize his point. "They want to get me back so they can shut me up forever."

Whatever Lai's fate, his case provides an unprecedented glimpse into the often seamy and illicit web of economics and politics that defines business in China today. Foreign firms may be salivating at the thought that China's entry into the World Trade Organization could open up a market of 1.3 billion citizens. But business in the country is far too complex and incestuous for an international economic treaty to provide a neat solution. China's Cabinet has labeled corruption as the nation's No. 1 problem, and over the past year Beijing has launched a massive antigraft campaign in an effort to renew business confidence. More than 80% of Chinese university students believe China's biggest companies are corrupt, according to a recent online poll. Even Lai, who professes not to have committed any crimes during his stratospheric rise to power, admits, "The whole system in China is corrupt. To get ahead, you have to become part of that system."

No one, it seems, took advantage of that labyrinthine system more deftly than Lai. Beijing accuses him of having run a smuggling operation that racked up $6.4 billion in revenues from 1996 to 1999 alone—an amount almost equivalent to Xiamen's annual GDP. In that time, Beijing claims it lost $3.6 billion in unpaid tax revenues from Lai's activities, and China's state oil companies say they lost $360 million a year because of his smuggled oil. Lai is accused of sneaking everything from cigarettes to cooking oil, TVs to cars into Fujian province, with the direct complicity of hundreds of government officials.

All the while, Lai lived spectacularly large. He flitted about China building deluxe villas for his family, blowing money at chic nightclubs, and playing the beneficent philanthropist. A film buff, Lai constructed a $17 million replica of the Forbidden City in the outskirts of Xiamen as a giant set for future movies. He bought the city's soccer team, occasionally moonlighting as goalie. And he broke ground on an 88-story skyscraper that was to be Xiamen's tallest building—a worthy flagship for his empire.

Eventually, Lai's excesses became so outrageous that even the rulers in faraway Beijing began to take notice. "If Lai Changxing were executed three times over, it would not be too much," fumed Premier Zhu Rongji in October 2000. Indeed, it was Zhu himself, China's most vocal graft buster, who the year before had ordered an investigation into Lai's alleged smuggling, later precipitating the disgraced businessman's escape to Canada. For more than a year, state newspapers were filled nearly every day with the sordid details of Lai's alleged crimes, making him the greatest symbol of the country's mounting but, ultimately, all-too-narrow corruption crackdown. It soon grew to be the largest and most expensive criminal case in the history of the People's Republic.

From the outside, the infamous Red Chamber looks like any other office building in Xiamen—a drab and dusty complex covered in red tiles. Across the street, a row of beauty parlors sell haircuts, massages and more. Farther down, a sex shop hawks oversize dildos and the top-selling Plump Landlady blow-up doll. "This shop is nothing," laughs Liu Yan, the manager of the sex store. "Just think about what went on inside the Red Chamber."

It was this seven-story building that cemented Lai's over-the-top reputation in Xiamen. Premier Zhu's team of investigators, dubbed 4-20 for the date they began their detective work, alleges that this plush pleasure palace lay at the heart of Lai's efforts to corrupt dozens of businessmen and government officials. Leased to Lai by the local Public Security Bureau in 1996, the building held four opulent dining rooms for the culinary amusement of his friends. On the third floor, the sensual pleasures became more dizzying: four massage rooms, two Jacuzzis, a sauna, a steam room. The fourth floor boasted a 40-seat movie theater, a karaoke parlor, a bar and three mini dance halls. The lavish bedrooms were on the next floor. According to 4-20 investigators, hundreds of Lai's acquaintances flowed through the Red Chamber, and they became integral partners in Lai's financial dealings. "I would drop people off at the Red Chamber," recalls a limo driver for Yuanhua, "and I would hear them be skeptical about Mr. Lai. But when I would take them to the airport, most were filled with praise for him."

Certainly, Ai Ai, whose name means Double Love in Chinese, adored Lai. In her home village, Ai Ai was regarded as proof that Zhejiang girls were the prettiest in China. After graduating from high school, she worked as a hostess in a Shanghai hotel before ending up at the Red Chamber in 1997. There, she met some of China's most alluring girls—leggy lasses from Inner Mongolia, slim beauties from tropical Hainan Island. Ai Ai says she entertained a slew of businessmen and government bureaucrats, including one Beijing customs official whom she dubbed Fat Nose. He visited Lai's pleasure den several times, she says, never paying for his stay in a luxurious suite on the fifth floor. Ai Ai was his favorite plaything, she recalls, and he rewarded her affections with a diamond-encrusted brooch and designer handbag. Only once did Ai Ai talk to Lai directly, but she remembers it with awe. Lai patted her backside, she says, then handed her a stack of 100-yuan notes. "Everybody liked Boss Lai," says Ai Ai, who now works as a hotel concierge. "I'm sad that the same people who came to the Red Chamber have turned against him."

Indeed, despite his flashy ways, Lai was popular in Xiamen. Unlike other rich businessmen, he always seemed willing to share the spoils. He made sure that members of the extended Lai clan were employed at his various companies. His brothers Lai Changbiao, Lai Changtu and Lai Shuiqiang helped run his cigarette and automotive concerns, and his wife's brothers and his nephews worked for him too. Chen Lian, an office lady for one of Lai's smaller ventures in the mid-'90s, remembers telling him that her son had been kicked out of high school and had no employment prospects. "Mr. Lai told me he hadn't been good at school, either," recalls Chen, "so he got my son a job as a night watchman for Yuanhua." Another employee, a limo driver, remembers Lai giving him a $400 tip for no apparent reason.

Lai's lack of airs was similarly endearing. One guest at the Red Chamber remembers Lai uncorking bottles of expensive wine and toasting his dinner companions, who were to feast on such delicacies as shark's fin soup and abalone. Lai then disappeared, slinking back to the kitchen to slurp down rice porridge instead. At nightclubs, he would invariably buy the most expensive liquor but he rarely bothered to savor it, preferring beer.

Even today, some members of Xiamen's police force secretly confess to having liked Lai. They appreciated his plainspoken demeanor, his refusal to look down on them—and, of course, his generosity. One ex-cop says his ill-equipped squad was given motorcycles and jeeps by Lai to help them keep the streets safe. Other officers received new cell phones from Lai so they could make calls while on the beat. Lai claims he also donated money to build a new cadre-training facility. "Honestly, I think he did more for this city than the government ever did," whispers a former police lieutenant, whose brother worked for Yuanhua. "When he made money, we all saw the benefits."

Lai was born the seventh of eight children to a loyal government functionary in Shaocuo village, a couple of hours' drive from Xiamen. Reared on rice porridge, he and his four brothers were strikingly plump, known as much for their girth as their mischief making. Even during the chaos of the Cultural Revolution, the Lai boys still found time to goof around, while other village boys morphed into fervent Red Guards. "They were always up to no good," says Lai Xinli, a 70-year-old distant cousin. "But it was just kids being kids. We knew they'd grow up into something special." Lai finished only three years of elementary school, and he still comes across as a slightly slow-witted but amiable guy. He stumbles over big words, speaks heavily accented Mandarin and has trouble writing complicated characters. When he reaches the end of his long, tortured sentences, you often have no idea what he meant to say.

But Lai had a genius for making allies and money. After a few years digging wells, he pooled together $150 with a couple of friends and started an automotive-parts factory. It was 1979, and China had just opened up to the idea of private enterprise. Fujian province was one of the first to embrace Deng Xiaoping's economic reforms. With barely any private enterprises around yet, Lai's only real competition was the lumbering state-owned sector. Lai found that paying his employees slightly more than the state could pay made them work harder—which in turn helped make him rich. Over the next few years, he reinvested the profits from his little car-parts plant into a series of new ventures—soon the automotive factory spawned a textile plant, a print shop, an electronics store, an umbrella factory, a shipping enterprise, an investment company, a cigarette plant, a paper-products factory and at least half-a-dozen other enterprises. Lai says even he isn't sure how many companies he owned: "You could start a business in the morning and make money by the evening. Everything was so free and open back then that everyone had lots of businesses. You would be stupid not to."

In 1991, Lai emigrated to Hong Kong, helped, he says, by a family friend and Hong Kong resident who adopted him, even though Lai was already 35. Lai claims he changed his name to his adoptive family's surname, Cai, when he moved to Hong Kong, then switched back to Lai a couple of years later. "It was very kind of him to adopt me," says Lai. Hong Kong and Chinese police allege, however, that Lai's Hong Kong ID card was a fake, and they have convicted several Chinese officials for emigration fraud for their role in his relocation.

Whatever the case, Hong Kong residency opened up a whole new world of opportunity. Lai bought up acres of Hong Kong real estate, although he can't recall exactly how much—"it was so much, it's very hard to remember everything." He launched an import-export firm with goods from Hong Kong delivered to Xiamen's Haixin container yard, in which Yuanhua owned a 75% stake. And he bought a mansion on the Peak because he was told that's where the rich live. Still, he didn't much like it: "The people in Hong Kong are very snobby. I prefer real people."

Meanwhile, Yuanhua was growing to a point where it employed hundreds of workers, although many admitted that they didn't do much in the way of actual work. "Every year I got another raise," says a middle manager surnamed Bai, who was hired by a Yuanhua subsidiary. "But I barely did anything at all." She would come in at 9 a.m., make tea, read the newspapers, have lunch from noon till 2 p.m., then read romance novels at her desk. Occasionally, an employee from Yuanhua's main office would arrive from the port and ask her to stamp some import papers, which she would do with barely a glance. "Looking back," says Bai, "there's no way the company could have been legal, but I figured that the department next door was making money to cover for our losses." Most likely, each department at Yuanhua thought the very same thing.

In fact, Chinese authorities allege that Yuanhua was nothing but a front for Lai's massive smuggling operations, which involved goods shipped in from as near as Hong Kong and as far as Cyprus. The alleged booty included petrochemicals, VCRs, construction materials, porno tapes, designer watches and luxury cars. According to 4-20 investigators, containers filled with smuggled goods like Mercedes-Benz sedans were falsely declared to contain low-taxed items like wood pulp when they arrived at Haixin container yard. One sample container that was truly filled with wood pulp could be shown to customs officials, who would obligingly wave the other containers through.

It's a sublimely lucrative way of doing business. Chinese police allege, for example, that one of Lai's ships imported more than 10 million packs of cigarettes to Haixin in March 1999, and saved $18 million in duties by declaring them as wood pulp. Investigators claim Lai would then sell his imports in Xiamen, or would use a network of truck drivers to haul the smuggled goods to other parts of Fujian. Other smuggling methods were more sophisticated. Sometimes, according to the ex-foreman at Haixin, containers full of illicit goods were switched with legal ones that had already been approved by customs. Each month, he says, more than 100 containers were secretly switched, often at night. Still other shipments were declared to be entrepot goods, meaning China was merely a transit port, so the containers were exempt from import duties. In reality, claim Chinese prosecutors, these goods were off-loaded in China.

All these sleights of hand reportedly happened under the nose of Yang Qianxian, former director general of Xiamen's customs office and an old acquaintance of Lai from the 1980s. Yang told a Chinese court that Lai gave him a lover and a Lexus in return for looking the other way. He's since been handed a commuted death sentence. For his part, Lai denies such offerings were bribes: "Sure, I gave my friends gifts, but not because I wanted anything from them."

The difference between bribes, gifts and loans often seems merely semantic in China. "If a foreign business that wants approval from the local government is strongly encouraged to donate money to a government-run charity," asks a FORTUNE 500 executive in Shanghai, "is that a gift or a bribe?" Lai himself admits he loaned dozens of government officials cash over the years but insists these weren't bribes. In the mid-'90s, for instance, he lent the wife of Deputy Minister of Public Security Li Jizhou $121,000 to open a restaurant in Beijing. A year later, he lent Li's daughter $500,000 while she was living in San Francisco. None of the money was ever paid back, nor were the transactions recorded on paper. Lai also admits to having lent $250,000 to Xiamen vice mayor Lan Pu, for his son to build a house in Australia. The reason he never requested the loan be repaid? "[I had to] give him some face," says Lai. In addition, Lai admitted to giving nearly $2 million in outright gifts to Public Security and customs officials from 1991 to 1997. "I am a generous person," he says. "Why should that be held against me? I was just giving to my friends."

Nowhere was Lai's largesse more evident than in his hometown of Shaocuo. Lai practically rebuilt the scraggly village, spending $12 million by his own estimate. He donated everything from a new hospital to an old-age home, from the Changxing Kindergarten to the Yuanhua Middle School. On Chinese New Year, Lai would hand out red packets filled with $250 to each village resident over 60 years old. His family became village heroes; when Lai's mother died in 1996, the local primary school closed for two days. The grieving was even more pained when Shaocuo residents heard rumors of Lai's downfall. "We all mourned for days when we heard what happened to Lai Changxing," says a distant relative Lai Ruining. "Now, who will take care of our village?"

On a stifling summer day in August 1999, Lai took an urgent phone call from an old friend, Zhuang Rushun. As head of public security in nearby Fuzhou, Zhuang had heard that the cops in Xiamen were planning to arrest Lai the next day. He told Lai to run. Hundreds of Premier Zhu's investigators had been in town for four months already, but Lai had assumed he could handle them. Now, he wasn't so sure. He hopped a speedboat out of Xiamen, landing in Hong Kong on Aug. 11. Lai and his family fled to Vancouver three days later. For tipping off his friend, Zhuang was later jailed; he was also convicted of accepting $65,000 in bribes from Lai.

Today, Lai claims to have been the innocent victim of a political witch-hunt. As he tells it, the Public Security Bureau in Beijing was taken over by a new police chief hell-bent on clearing out hundreds of officials from a rival camp—including Lai's old buddy Deputy Public Security Minister Li. Officially, Li was in charge of China's top anti-smuggling task force, but the new police chief Jia Chunwang accused him of being in cahoots with the smugglers he was meant to catch. Li was given a commuted death sentence late last year, in part for accepting bribes from Lai. Not surprisingly, Beijing dismisses Lai's claim that he was merely caught up in this purported power struggle.

At first, Lai lived it up in Canada, buying a luxury mansion in Vancouver and indulging in gambling jaunts across the country. He visited the Niagara Casino in Ontario more than 30 times, becoming a VIP member. Then, in May 2000, four members of a Chinese business delegation walked through the lobby of Vancouver's glitzy Delta Hotel on their way to a secret meeting with him. It turned out that three of these delegates were not businessmen at all but members of the 4-20 investigation team; the other was Lai's older brother Lai Shuiqiang, who Chinese authorities claim had run Lai's cigarette-smuggling business. Shuiqiang had been in jail for several months before his trip to Canada, and the 4-20 team thought his presence might persuade Lai to return home, sparing the rest of the family from heavier sentences.

Lai met with the negotiators three times and even paid their hotel and cell phone bills. But he ultimately decided not to strike a deal with the Chinese government. "In China, the Communist Party controls everything, including the law," says Lai. "I wasn't going to be tricked." A couple of weeks later, he applied for political asylum in Canada. Back in China, Shuiqiang was sentenced to seven years' imprisonment. Another of Lai's brothers, Lai Changtu, and four of his nephews were also jailed, as were his wife's parents and two of her siblings.

With many of his bank accounts frozen and legal fees piling up, Lai was soon forced to trade in his grand Vancouver house for a more modest apartment. In the fall of 2000, the Canadian authorities clamped down further, charging Lai and his wife with immigration violations. The alleged emperor of Chinese crime, the purported Al Capone of smugglers, was now confined to limited house arrest.

Three years after lai's ignominious escape, Xiamen has lost its once vaunted momentum. Just a few years ago, the city was throttling so fast into the future that some of the town's traffic lights were fixed with countdown clocks so drivers could accelerate the moment the light changed. But now, with dozens of police, customs and mayoral staff in jail, Xiamen has become a pariah in the eyes of domestic and foreign investors. Yuanhua, it turned out, was intertwined with hundreds of local companies from tour agencies to flower shops, and the 4-20 dragnet has closed down a myriad of firms, leaving Xiamen in a deep funk. Taxi drivers complain that petrol costs 20% more now that the smuggled stuff is no longer available. And in the center of town, where Lai planned to build his 88-story skyscraper, a lake of stagnant water now festers.

To recover some of the losses, government officials have tried auctioning Lai's holdings, including the five-star Yuanhua International Hotel and the Forbidden City film studio. But so far, there have been no takers for his major holdings. The Red Chamber reopened briefly as an anticorruption museum last year but was quickly shuttered when tourists seemed to take its opulence as an inspiration instead of a warning. Xiamen residents are bitter that their city has been targeted, when, they say, corruption is equally rampant in other Chinese cities. Indeed, even Beijing admits that smuggling is hardly limited to Xiamen or Fujian; when the top 10 multinational corporations in Shanghai were polled earlier this year, they counted China's smuggling and pirated goods problem as their biggest corporate headache. "The crackdown has been too complete," grumbles the owner of a struggling import-export company in Xiamen. "There's no one left to do business with anymore." Says a local employee of the People's Daily, the official state newspaper: "Only the government thinks smuggling is stealing. The rest of us just think it's the way business is done in Fujian province."

Meanwhile, in Lai's hometown Shaocuo, Lai Changbiao, once the most swashbuckling of the Lai siblings, passes most of his time alone in a darkened room. Changbiao was involved in a barroom fight in 1999 and a bodyguard smashed a bottle of Hennessy XO over his head. He fell into a coma and is now a paraplegic. At first, Lai sent his older brother to the best hospital in Beijing for therapy, but money has run out. So Changbiao uses an old cooking-oil bottle filled with water as a weight to exercise his atrophied limbs. "Please tell my brother I am fine," he whispers, tears falling across his face and down the jagged scar running from his temple to the back of his head. "Tell him I am praying for him every day."

Sitting in his Vancouver apartment, Lai accepts the message from his ailing brother with a slow nod of the head. Beside him, his wife sniffles softly. The once proud Lai clan has been ravaged—two brothers in jail, one partially paralyzed, one under limited house arrest an ocean away. Lai is currently permitted to venture out for only a couple of hours a day. Mostly, he restricts his jaunts to shopping at the Taiwanese grocery down the street, picking up food for the evening stir-fry. Occasionally, people approach him he says, and express their support: "They tell me to believe in Canada because they would never send me back to my death." But in June, Lai's request for refugee status was denied. Now, his lawyers are applying for a judicial review of the decision—a process that could take up to two years to wend its way through Canada's courts.

Until then, Lai plans to stay with his wife and three children in their cramped Vancouver apartment with its gray walls and scant furnishings. It's a gloomy place, scarcely brightened by a smattering of family photos, some crystal animals in a display cabinet, a huge TV and a plastic fruit bowl on the dining room table. The Canadian police have raided it several times, seizing stacks of documents and adding to Lai's bleak sense that this home is no castle.

Still, the Lai family is trying its best to make a go of immigrant life. Lai's two younger kids are learning English at a local public school, though his eldest child, 18-year-old Kenny, has announced that he doesn't want to go to school anymore. "I want to give my children hope," says Lai's wife Zeng, who takes a daily dose of antidepressants. "But I have lost hope myself." Lai fingers his favorite memento, a gold lighter from the Niagara Casino, where he's now barred. "It is all a tragedy," he says. "Who would have thought it would turn out like this?" The question lingers in the silence, and Lai shakes his head quietly with the air of a man who has gambled everything and lost.